Across The Border

Measuring the long-term costs of the ‘G20 blue’ plan

Paper, chemical materials, and medicine makers have enjoyed a bounce in their share prices — but clearing the skies above Hangzhou for September’s G20 summit is also expected to have wider economic effects

PUBLISHED : Friday, 08 July, 2016, 6:46pm
UPDATED : Thursday, 06 July, 2017, 11:37am

As preparations continue to make the skies above the G20 summit in Hangzhou in early September as blue and smog-free as possible, manufacturers involved in industries with heavy emission levels have ironically been enjoying a bounce in their share prices.

Zhejiang officials announced in May they were requiring industrial factories within a 300-kilometer radius of the Hangzhou Olympic Sports Expo Center to suspend production for 20 days until September 6, according to a notice issued by the Department of Housing.

Many paper, chemical materials, and medicine manufacturers in cities including Hangzhou, Ningbo and Jiaxing will be affected.

Analysts have observed that vitamin pills makers, for example, have outperformed A-share benchmarks in the past fortnight.

Industry leader Zhejiang NHU Co saw its shares gain 16.5 per cent to 22.83 yuan in Shenzhen in the past two weeks, while Zhejiang Medicine Co rose 8 per cent to 13.58 yuan.

Cui Jieming, an analyst at Northeast Securities, expects the vitamin sector to continue to see an “independent rally” in the next two weeks, despite any loss or gain in the mainland benchmark.

“The G20 is a catalyst for the cyclical rebound in the sector.

“Coincidently, several foreign suppliers halted trading at the start of the year, while the G20 will limit overall domestic supply,” Cui said.

“Some factories have already suspended production in advance.”

But as well as pushing up share prices, the efforts at ensuring clear skies above the summit, have also started having wider, longer-term implications for the companies and the sectors affected.

Experts are confident this and other strengthened efforts by the government on environmental protection will weed out the small, inefficient and poorly run operators.

But they say too that the market leaders will inevitably become more powerful.

In anticipation of the “G20 blue” plan, NHU said it planned to stop vitamin A production for three months, during which factory maintenance and inspection would be carried out, while Zhejiang Medicine said it would halt for a month.

Such a big stock rally won’t last long once investors digest the G20 factor
Cui Jieming, an analyst at Northeast Securities

That represents a reduction of nearly 2,000 tonnes of vitamin A, which represents six per cent of global supply, according to a note by SWS Research.

With many of Zhejiang’s other vitamin producers being forced to halt producing in August and September before the summit, SWS Research said, it is expecting a price hike in vitamin product prices, which is likely to benefit the net profit growth of leading producers.

“Such a big stock rally won’t last long once investors digest the G20 factor,” Cui said.

“But for the vitamin industry, product prices have been rock bottom for a long time, and a rise is certain.”

Given the relatively low costs to enter the sector, he said there would be a mushrooming in the number of smaller manufacturing startups hoping to benefit quickly once sales prices edged up.

Many, however, could struggle very soon after, as supply jumps and prices then retreat.

“Small factory owners never cared about pollution in the past, but the regulations were too loose,” Cui said.

As governmental regulations tighten, the smaller enterprises would also be unlikely to compete effectively with leading enterprises.

The price of vitamin A has surged from 95 yuan per kilogram in December 2015, to 320 yuan per kilo at the turn of this month, approaching its historic high of 360 yuan in June 2008, according to data provider Wind Information.

Li Minggang, an analyst with Haitong Securities, noted recently that vitamin A could easily now break through that 360 yuan mark, and continue rising.

And there’s a similar G20 effect being seen, too, in the chemical and paper sectors.

Lee & Man Paper Manufacturing has seen its share price climb 12.3 per cent during the same six-month period, with Nine Dragons Paper (Holdings) rising 3.0 per cent.

Mason Securities said in a report that paper factories in eastern China raised their prices in the second quarter, an unusual time to do that, as traditionally industrial demand only picks up in Q3.

Observers believe the G20 is the major reason behind the hikes, while others add that the rises are actually as much to do with strengthened operator confidence, Mason’s report said.

In the long run, the two paper industry leaders are likely to enjoy greater pricing power thanks to China’s stricter rules on environment protection, analysts say.

“Due to the higher environmental requirement, it is more difficult to get approval from local governments to add new capacity,” Credit Suisse analysts Joy Zhang and Trina Chen wrote in a note, adding that as rules tighten and companies are forced to upgrade, small- to mid-sized plants will struggle, and inevitably some will close.

In the propylene industry, too, there is expected to be little new capacity added in the third quarter, given the G20 restrictions, which will have a major impact on propylene supply and prices in the eastern China, UBS Securities analyst NinaYYan wrote in a note.

That will certainly continue to benefit Shandong-based industry leader Wanhua Chemical Group, Yan added, whose shares have surged 10.9 per cent since the beginning of June.